Stock Market Response to Ifrs/Ias Cash Flows
29 Pages Posted: 19 Dec 2005
Date Written: August 11, 2005
Abstract
This paper investigates the value relevance of cash flow figures prepared according to the IAS 7 Cash Flow Statements. Following previous studies in the field, we define the value relevance as the ability of financial information to explain stock prices and returns, i.e. the levels and changes of the market value of the equity of the firm. Our results indicate that the levels and changes of the IAS cash flows contain incremental value-relevant information as compared to levels and changes of the IAS earnings, when the cash flow and earnings figures are correlated with stock returns. However, the cash flow figures do not contain incremental information when correlated with stock prices. The IAS earnings result in economically reasonable estimates of the cost of equity capital as indicated by the degree of the estimated earnings response coefficients. Supporting the results by Cheng et al. (1996) and Cheng and Yang (2003), we find that the earnings extremity as measured by the extreme values of earnings-to-price ratios should be controlled for in the value-relevance regressions. We also find some evidence suggesting that stock prices lead the IAS earnings and cash flows. Finally, our results remain unchanged after controlling for the effect of negative earnings or cash flows, and the annual variation in stock prices and returns.
Keywords: Cash flows, Stock market, International Financial Reporting Standards
JEL Classification: G12, G14, G15, M41, M47
Suggested Citation: Suggested Citation
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